CITY OF MBOMBELA management policy .pdfReview Date: 29 March 2018 Page 5 1. Purpose of this document...

Review Date: 29 March 2018

CITY OF MBOMBELA

ASSET MANAGEMENT POLICY


Page 1

Contents

1. Purpose of this document ................................................................................................................ 5

2. Scope ............................................................................................................................................... 5

3. Background ..................................................................................................................................... 5

3.1 Constitutional and Legal Framework........................................................................................ 5

3.2 Accounting standards ................................................................................................................ 6

3.3 Management of infrastructure and community assets .............................................................. 6

4. Objective of the Asset Management Policy .................................................................................... 9

5. Approval and effective date ............................................................................................................ 9

6. Delegations and Key Responsibilities ............................................................................................ 9

6.1 Role of the Municipal Manager ................................................................................................ 9

6.2 Role of the Chief Financial Officer (CFO) ............................................................................. 11

6.3 Role of Disposal Committee ................................................................................................... 11

6.4 Manager Assets and Insurance ................................................................................................ 12

6.5 The Manager: Budget ............................................................................................................. 12

6.6 The Manager: Expenditure section ......................................................................................... 13

6.7 Role of other departments ....................................................................................................... 13

6.7.1 Corporate service Department ............................................................................................. 13

6.7.2 Community Services ............................................................................................................ 13

6.7.3 All Departments ................................................................................................................... 13

7 Policy for Fixed Asset Accounting ................................................................................................ 15

8. Fixed asset register (FAR) ............................................................................................................ 20

8.1.1 Format .................................................................................................................................. 20

8.2 Classification and identification of Assets .............................................................................. 23

8.3. MEASUREMENT AT RECOGNITION .............................................................................. 29

8.4. MEASUREMENT AFTER RECOGNITION ....................................................................... 36

8.5 DEPRECIATION ................................................................................................................... 39


Page 2

8.6. IMPAIRMENT ...................................................................................................................... 44

9 Disposal of assets ........................................................................................................................... 50

9.2 Other write offs ....................................................................................................................... 51

9.3 Proceeds /Gain or Loss on disposal of assets.......................................................................... 52

9.4 Disclosure of assets disposed of ............................................................................................. 52

10. Funding Sources.......................................................................................................................... 55

10.1 Government and other conditional grants ............................................................................. 55

10.2 Finance leases ....................................................................................................................... 57

10.3 Donations .............................................................................................................................. 57

10.4 Surplus cash .......................................................................................................................... 57

11 Replacement Strategy .................................................................................................................. 58

12 Asset Risk Management .............................................................................................................. 58

12.1 Insurance ............................................................................................................................... 58

12.2 Other risk reducing methods ................................................................................................. 59

13 Maintenance of assets .................................................................................................................. 60

13.1 Maintenance plans ................................................................................................................ 60

13.2 Deferred Maintenance ........................................................................................................... 60

13.3 General maintenance ............................................................................................................. 61

14 General Requirements .................................................................................................................. 61

14.1 Bar coding ............................................................................................................................. 61

14.2 Physical inventory of all movable assets .............................................................................. 62

14.3 Acquisition ............................................................................................................................ 63

14.4 Asset management responsibilities ....................................................................................... 63

14.5 Additions / Improvements..................................................................................................... 64

14.6 Termination of employee’s service ....................................................................................... 65

14.7 Transfer of Assets ................................................................................................................. 65

14.8 Disposal of assets .................................................................................................................. 65

15. Asset Useful Live Guide ............................................................................................................... 1

Infrastructure Assets ....................................................................................................................... 1


Page 3

Community Assets .......................................................................................................................... 3

Heritage Assets ............................................................................................................................... 4

Investment Assets ........................................................................................................................... 4

Other Assets .................................................................................................................................... 5

Paraphrase of Section 14 of the Municipal Finance Management Act 2004 .................................. 1

GRAP 13 Definitions of Finance Leases ........................................................................................ 2

16. Policy Review ............................................................................................................................... 3

17. References ..................................................................................................................................... 3


Page 4

Abbreviations

Item Description

ADC Asset Disposal Committee

AM Asset Management

AMP Asset Management Policy

MUNICIPAL

MANAGER

Accounting Officer

ASB Accounting Standards Boards

CFO Chief Financial Officer

CMIP Comprehensive Municipal Infrastructure Plan

COGTA Department of Co-Operative Governance and Traditional

Affairs

CRC Current Replacement Cost

DRC Depreciated Replacement Cost

EUL Estimated Useful life

GIAMA Government-wide Immovable Asset Management Act

GIS Geographical Information System

GRAP Generally Recognized Accounting Practice

FAR Fixed Assets Register

GRAP Standards of Generally Recognized Accounting Practice

IAMP Infrastructure Asset Management Plan

IAS International Accounting Standards

ISO International Standards Organization

MFMA Municipal Finance Management Act

PPE Property, Plant & Equipment

RUL Remaining Useful Life

RV Residual value

SCM Supply Chain Management


Page 5

1. Purpose of this document

This document indicates the policy of City of Mbombela for the management of its movable

and immovable Property Plant and Equipment (PPE), investment property, intangible,

biological assets and heritage assets.

The procedures required to implement this policy are provided in a separate document. The

policy commits the municipality to establishing and maintaining an asset register that

complies with the latest accounting standards, and managing the assets in a way that is

aligned with the municipality’s strategic objectives and recognized good practice.

2. Scope

This policy applies to all movable and immovable assets (PPE, investment property,

intangible, biological assets and heritage assets) under the control of the municipality.

3. Background

3.1 Constitutional and Legal Framework The South African Constitution requires municipalities to strive, within their financial and

administrative capacity, to achieve the following objectives:

providing democratic and accountable government for local communities;

ensuring the provision of services to communities in a sustainable manner;

promoting social and economic development;

promoting a safe and healthy environment; and

Encouraging the involvement of communities and community organizations in matters of

local government.


Page 6

The manner in which a municipality manages its Property, Plant and Equipment (PPE),

investment property, intangible assets and heritage assets are central to meeting the above

challenges. Accordingly, the Municipal Systems Act, 2000 (MSA) section 2(d) specifically

highlights the duty of municipalities to provide services in a manner that is sustainable, and the

Municipal Finance Management Act (MFMA) requires municipalities to utilize and maintain their

assets in an effective, efficient, economical and transparent manner. The MFMA specifically

places responsibility for the management of municipal assets with the Municipal Manager

(MUNICIPAL MANAGER).

The Occupational Health and Safety Act (OHSA) requires municipalities to provide and

maintain a safe and healthy working environment, and in particular, to keep its PPE safe.

3.2 Accounting standards The MFMA requires municipalities to comply with the Standards of Generally Recognized

Accounting Practice (GRAP), in line with international practice.

The Accounting Standards Board (ASB) has approved a number of Standards of GRAP. When

compiling the asset register in accordance with the accounting standards, the requirements of

GRAP 17 cannot be seen in isolation. Various other accounting standards impact on the

recognition and measurement of assets within the municipal environment and should be taken

into account during the compilation of a GRAP compliant asset register. The applicable standards

of GRAP are noted in section 8.

3.3 Management of infrastructure and community assets Effective management of infrastructure and community facilities is central to the municipality

providing an acceptable standard of services to the community. Infrastructure impacts on the

quality of the living environment and opportunities to prosper. Not only is there a requirement to

be effective, but the manner in which the municipality discharges its responsibilities as a public

entity is also important.


Page 7

The municipality must demonstrate good governance and customer care, and the processes

adopted must be efficient and sustainable. Councilors and officials are custodians on behalf of

the public of infrastructure assets, the replacement value of which amounts to several hundred

million Rand.

Key themes of the latest generation of national legislation introduced relating to municipal

infrastructure management include:

long-term sustainability and risk management;

service delivery efficiency and improvement;

performance monitoring and accountability;

community interaction and transparent processes;

priority development of minimum basic services for all; and

The provision of financial support from central government in addressing the needs of the

poor.

Legislation has also entrenched the Integrated Development Plan (IDP) as the principal strategic

planning mechanism for municipalities. However, the IDP cannot be compiled in isolation – for

the above objectives to be achieved, the IDP needs to be informed by robust, relevant and

holistic information relating to the management of the municipality’s infrastructure.

There is a need to direct limited resources to address the most critical needs, to achieve a

balance between maintaining and renewing existing infrastructure whilst also addressing

backlogs in basic services and facing ongoing changes in demand. Making effective decisions on

service delivery priorities requires a team effort, with inputs provided by officials from a number

of departments of the municipality.

COGTA has prepared guidelines in line with international practice, that propose that an

Infrastructure Asset Management Plan (IAMP) is prepared for each sector (such as potable

water, roads etc.). These plans are used as inputs into a Comprehensive Municipal Infrastructure

Plan (CMIP) that presents an integrated plan for the municipality covering all infrastructures. The


Page 8

arrangements outlined in the COGTA guidelines are further strengthened by the provision of

National Treasury’s Local Government Capital Asset Management Guidelines. This is in line with

the practice adopted in national and provincial spheres of government in terms of the

Government-wide Immoveable Asset Management Act (GIAMA).

Accordingly, the asset register adopted by a municipality must meet not only financial

compliance requirements, but also set a foundation for improved infrastructure asset

management practice.

Recognized good practice in the management of infrastructure assets from across the globe has

been increasingly documented over the past 10 to 15 years. In 2000, the World Bank cited

practice in Australasia as representative of best practice and this has been captured in the

International Infrastructure Management Manual (IIMM), and regularly updated with case

studies from across the globe, including South Africa. In 2008 the British Standards Institute

issued PAS 55 (a publicly available specification on asset management). The International

Standards Organization (ISO) has drawn on these documents to establish an international

standard for infrastructure asset management (ISO 55000 series) which has been issued in

January 2014. Progressive entities are expected to set compliance with the proposed ISO as a

benchmark for practice.


Page 9

4. Objective of the Asset Management Policy

The Asset Management Policy provides direction for the management, accounting and control of

Property, Plant & Equipment (Fixed Assets) owned or controlled by the Council

5. Approval and effective date

The CFO is responsible for the submission of the Policy to Council to consider its adoption

after consultation with the Municipal Manager (MUNICIPAL MANAGER). Council shall indicate

the effective date for implementation of the policy.

6. Delegations and Key Responsibilities

6.1 Role of the Municipal Manager The Municipal Manager is responsible for the management of the assets of the municipality,

including the safeguarding and the maintenance of those assets.

The MUNICIPAL MANAGER shall ensure that:

Ensure implementation of the approved Asset Management Policy as required in terms of

section 63 of the Municipal Finance Management Act (MFMA).

Physical verify assets in possession of the Council annually, during the course of the


Page 10

financial year.

Keep a complete, accurate and balanced record of all assets in possession of Council.

Report in writing all asset losses, where applicable, to Council.

Ensure that assets are valued and accounted for in accordance with a standard of GRAP.

Establishment of an asset disposal committee

The Heads of Departments and their teams comply with this policy.

The Municipal Manager of the municipality (MM) shall be the principal custodian of the entire

municipality’s assets, and shall be responsible for ensuring that this policy is effectively applied

on adoption by Council. To this end, the MUNICIPAL MANAGER shall be responsible for the

preparation, in consultation with the Chief Financial Officer (CFO) and Head of Departments, of

procedures to effectively and efficiently apply this policy.

This policy should be applied with due observance of the municipality’s policy with regard to

delegated powers. Such delegations refer to delegations between the Municipal Manager and

other responsible officials as well as between Council and the Executive Mayor and the Council

and the MUNICIPAL MANAGER. All delegations in terms of this policy must be recorded in

writing.

In accordance with the MFMA, the MUNICIPAL MANAGER of the municipality and all

designated officials are accountable to him / her. The MUNICIPAL MANAGER is therefore

accountable for all transactions entered into by his / her delegates. The overall

responsibility of asset management lies with the MUNICIPAL MANAGER. However, the day

to day handling of assets should be the responsibility of all officials in terms of delegated

authority reduced in writing. The MUNICIPAL MANAGER may delegate or otherwise assign

responsibility for performing these functions but will remain accountable for ensuring these

activities are performed.


Page 11

6.2 Role of the Chief Financial Officer (CFO) The Chief Financial Officer (CFO) is responsible to the MUNICIPAL MANAGER to ensure that the

financial investment in the municipalities’ assets are safeguarded and maintained. The CFO shall

be the custodian of the fixed asset register of the Municipality, and shall ensure that a complete,

accurate and up-to-date computerized fixed asset register is maintained

6.3 Role of Disposal Committee The asset disposal committee (ADC) shall be established by the Municipal Manager

(MUNICIPAL MANAGER) in line with the Supply Chain Management regulations. The

committee shall serve for a period not exceeding 12 months and shall be appointed by the

Municipal Manager in writing. The committee shall be chaired by the Chief Financial Officer

and key Departments will be represented. The disposal committee shall comprise of the

following members:

Chairperson (Chief Financial Officer)

Senior Manager: Supply Chain Management

Senior Manager: Legal Services

Senior Manager: Urban and Rural Development

Senior Manager: Housing and Properties

General Manager: Community Services

General Manager: Technical Services

Asset Manager : Asset management

The asset disposal committee shall:

Receive a consolidated asset disposal list from the Chief Financial Officer

Verify and confirm that assets on the consolidated disposal list does not

contravene with Section 14 of the Municipal Finance Management Act

Evaluate and recommend on the best disposal method to be used.

Advice Municipal Manager and Council on the disposal and writing off of assets


Page 12

6.4 Manager Assets and Insurance Shall ensure that complete records of asset items are kept, verified and balanced

regularly.

Shall ensure that all movable assets are properly bar coded and accounted for.

Shall conduct an annual audit inventory by scanning selected movable assets

and compare this inventory with the Departments asset sign offs.

Shall ensure that the FAR is balanced annually with the general ledger and the

financial statements.

Provide the Auditor-General or his personnel, on request, with the financial

records relating to assets belonging to Council as recorded in the FAR.

Shall ensure that the relevant information relating to the calculation of

depreciation is obtained from the departments and provided to the treasury

department in the prescribed format.

Shall ensure that asset acquisitions are allocated to the correct asset code.

Shall ensure that, before accepting an obsolete or damaged asset or asset

inventory item, a completed asset disposal form, counter signed by the Asset

management Section, is presented.

Shall ensure that a verifiable record is kept of all obsolete, damaged and unused

asset or asset inventory items received from the departments.

Shall compile a list of the items to be auctioned in accordance with the Supply

Chain Management (SCM) Policy.

Shall compile and circulate a list of unused movable assets to enable other

departments to obtain items that are of use to them.

Shall ensure that the SCM unit is notified of any disposal of written-off asset or

asset inventory items.

6.5 The Manager: Budget


Page 13

Shall ensure that the capital budget with funding source as submitted by the

departments is approved.

6.6 The Manager: Expenditure section

Shall ensure that invoices authorized for payment are matched to the goods

received note before processing such payment.

Shall if any doubt exists as to whether the invoice is in accordance with policy,

query the payment with the relevant department and shall not process a

payment until the invoice meets the policy criteria.

6.7 Role of other departments

6.7.1 Corporate service Department

The Corporate Services Department:

Shall ensure that no monies are paid out on termination of service without

receiving the relevant asset clearance form signed off by the relevant

department.

Shall ensure that every asset clearance form is counter signed by the Asset

Management Section before processing the termination of service.

6.7.2 Community Services The Community Services Section:

Shall ensure that the necessary security measures are in place to minimize asset

losses within Council owned buildings or facilities

Report to the Asset Management Section of any unauthorized asset movements

or transfers

6.7.3 All Departments General Manager:


Page 14

Shall ensure that employees in their departments adhere to the approved AMP.

Shall ensure that an employee with delegated authority has been nominated to

implement and maintain physical control over assets in the department. The

Asset management Section must be notified of who the responsible person is.

Although authority has been delegated the responsibility to ensure adequate

physical control over each asset remains with the general manager.

Shall ensure that all assets under their control are adequately safeguarded and

insured

Shall ensure that assets are properly maintained in accordance with the

maintenance policy.

Shall ensure that the assets of the council are not used for private gain.

Shall ensure that all their movable assets as reflected on the FAR and are bar

coded where possible.

Shall ensure that the Asset Management Section is notified of any changes in the

status of the assets under the department’s control.

Shall certify in writing that they have assessed and identified impairment losses

on all assets at year end.

Shall ensure that all obsolete and damaged asset items, accompanied by the

relevant asset form and attached disposal forms, are handed in to the Asset

Management Section without delay.

Shall ensure that the correct cost element and description are being used before

authorizing any requisitions.

The detailed assets as created in the financial system must be categorized and

clearly identified as follows:

Immovable Assets:

Infrastructure assets

Buildings

Land

Community assets

Heritage assets


Page 15

Recreational Facilities

Asset under construction (Only an asset after completion)

Town Development

Investment Properties

Intangible assets

Agricultural assets

Movable Assets:

Aircraft

Bins and Containers

Emergency Equipment

Emergency Vehicles

Furniture and Fittings

Heritage.

Motor Vehicles

Office Equipment

Plant and Equipment

Watercraft

Other

7 Policy for Fixed Asset Accounting

Recognition of Movable and immovable assets

(a) Definitions and rules

Definition of an asset

Asset

An asset is defined as a resource controlled by the council as a result of past events and from

which future economic benefits or service potential associated with the item will flow to the

council.


Page 16

Fixed Asset

A fixed asset (also referred to as a “non-current asset”) is an asset with an expected useful life

greater than 12 months.

PPE Property, plant and equipment are tangible assets that are held for use in the production or

supply of goods or services, for rentals to others, or for administrative purposes; and are

expected to be used during more than one reporting period. This includes items necessary for

environmental or safety reasons to leverage the economic benefits or service potential from

other assets. Insignificant items may be aggregated. Property, plant and equipment is broken

down into groups of assets of a similar nature or function in the municipality’s operations for the

purposes of disclosure in the financial statements.

Immovable PPE

Immoveable assets are fixed structures such as buildings, land and infrastructure. Plant that is

built-in to the fixed structures and is an essential part of the functional performance of the

primary asset is considered an immoveable asset (though it may be temporarily removed for

repair).

Movable PPE

Movable assets are the stock of equipment owned or leased by the municipality such as office

equipment and furniture, motor vehicles and mobile plant.

Investment property

Investment property is defined as property (land and/or a building, or part thereof) held (by the

owner or the lessee under a finance lease) to earn rentals or capital appreciation, or both (rather

than for use in the production or supply of goods or services or for administration purposes or


Page 17

sale in the ordinary course of operations). An example of investment property is office parks that

are rented out. There is no asset hierarchy for investment property; each functional item will be

individually recorded. Land held for a currently undetermined use is recognized as investment

property until such time as the use of the land has been determined.

Intangible assets

Intangible assets are defined as identifiable non-monetary assets, without physical substance.

Examples are licenses/ rights, (such as water licenses), servitudes and software.

An asset meets the criterion of being identifiable in the definition of an intangible asset when it:

a) is separable, i.e. is capable of being separated or divided from the municipality and sold,

transferred, licensed, rented or exchanged, either individually or together with a related

contract, asset or liability, or

b) arises from contractual rights (including rights arising from binding arrangements) or other

legal rights (excluding rights granted by statute), regardless of whether those rights are

transferable and separable from the municipality or from other rights and obligations.

Biological Assets

Biological assets are living animals or plants as per the definition in the GRAP on Agriculture.

Capital Spares (Major Spare Parts)

Spares and materials used on a regular basis in the ordinary course of operations are usually

carried as inventory (i.e. they are not usually considered fixed assets) and are expensed when

consumed. Major spares that constitute an entire or significant portion of a component type, or a

specific component, defined in the immovable PPE asset hierarchy are considered major spare

parts and are capital spare parts and are recognized as an item of PPE as they are expected to

be used for more than one period or they can only be used in connection with an item of PPE.


Page 18

Major inspections

A condition of continuing to operate an item of PPE may be to perform regular major inspections

for faults regardless of whether parts of the item are replaced (for example, Occupational Health

and Safety Act no. 85 of 1993 requires lifting equipment to be inspected once a year). When

each major inspection is performed, its cost is recognized in the carrying amount of the item of

PPE as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of

the cost of the previous inspection (as distinct from physical parts) is derecognized. This occurs

regardless of whether the cost of the previous inspection was identified in the transaction in

which the item was acquired or constructed. If necessary, the estimated cost of a future similar

inspection may be used as an indication of what the cost of the existing inspection component

was when the item was acquired or constructed.

Items used irregularly

Tangible items that are used in the production or supply of goods or services on an irregular

basis (such as standby equipment) are recognized as items of PPE.

Useful Life

Useful life is defined as the period over which an asset is expected to be available for use by the

municipality or the number of production or similar units expected to be obtained from the asset

by the municipality.

Control

An item is not recognized as an asset unless the municipality has the capacity to control the

service potential or future economic benefit of the asset, is able to deny or regulate access of

others to that benefit, and has the ability to secure the future economic benefit of that asset.

Legal title and physical possession are good indicators of control but are not infallible.

Past transactions or events

Assets are only recognized from the point when some event or transaction transferred control to

the municipality.


Page 19

Probability of the flow of benefits or service potential

The degree of certainty that any economic benefits or service potential associated with an item

will flow to the municipality is based on the judgment. The Municipal Manager shall exercise such

judgment on behalf of the municipality, in consultation with the CFO and respective Head of

Department.

Economic benefits

Economic benefits are derived from assets that generate net cash inflows.

Service Potential

An asset has service potential if it has the capacity, singularly or in combination with other

assets, to contribute directly or indirectly to the achievement of an objective of the municipality,

such as the provision of services.

Leased assets

A lease is an agreement whereby the lessor conveys to the lessee (in this case, the municipality)

the right to use an asset for an agreed period of time in return for a payment or series of

payments. Leases are categorized into finance and operating leases. A finance lease is a lease

that transfers substantially all the risks and rewards incident to ownership of an asset, even

though the title may not eventually be transferred (substance over form). Where the risks and

rewards of ownership of the assets are substantially transferred to the municipality, the lease is

regarded as a finance lease and the asset recognized by the municipality. Where there is no

substantial transfer of risks and rewards of ownership to the municipality, the lease is considered

an operating lease and payments are expensed in the income statement on a systematic basis

(straight line basis over the lease term).

Asset custodian)


Page 20

The department that controls an asset, as well as the individual (asset custodian) that is

responsible for the operations associated with such asset in the department, is identified by the

respective Head of Department, recorded, and communicated on recognition of the asset.

Reliable measurement

Items recognized are those that possess a cost or fair value that can be reliably measured

in terms of this policy.

8. Fixed asset register (FAR)

8.1.1 Format

The FAR shall be maintained in the format determined by the CFO, which format shall

comply with the requirements of any accounting requirements which may be prescribed.

Without in any way detracting from the compliance criteria mentioned in the preceding

paragraph, the FAR shall reflect at least the following information:

a brief but identifiable description of each asset

classification of each asset

the date on which the asset was acquired for use

the location of the asset

the departments within which the assets will be utilized

the responsible person for this asset

the title deed number, in the case of fixed property

the stand number, in the case of fixed property

an unique identification number

the original cost or fair value if no costs are available


Page 21

the (last) effective date of revaluation of the fixed assets subject to

revaluation

the revalued value of such fixed assets

the valuer who did the (last) revaluation

accumulated depreciation to date

the carrying value of the asset

whether this is a cash or non-cash generating asset

the method and, where applicable, the rate of depreciation

impairment losses

impairment recovery

the source of financing

whether the asset is required to perform basic municipal services;

the date on which the asset is disposed of

the disposal proceeds

the date on which the asset is retired from active use, and held for

disposal

the residual value of each asset

measurement model

General manager of department under whose control any fixed asset falls shall promptly

provide the CFO in writing of any information required to compile the FAR, and shall

promptly advise the CFO in writing of any material change which may occur in respect of

such information.

A fixed asset shall be capitalized, that is, recorded in the FAR, as soon as it is available for

use. If the asset is constructed over a period of time, it shall be recorded as work-in-

progress until it is available for use, where after it shall be appropriately capitalized as a

fixed asset.


Page 22

A fixed asset shall remain in the FAR for as long as it is in physical existence. The fact that

a fixed asset has been fully depreciated shall not in itself be a reason for writing-off such an

asset.

8.1.2 Different categories within FAR

The following is an outline of the requirements relating to the various types of asset

categories that the Council will maintain

Immovable Assets:

Infrastructure assets:

Electricity assets

Water networks and related assets

Waste water networks and related assets

Roads, bridges and Storm water

Land and Buildings

Investment properties

Community assets

Heritage assets

Intangible assets

Agricultural assets

Other assets

Movable Assets:

Office Equipment

Furniture and Fittings

Bins and Containers


Page 23

Emergency Equipment

Motor Vehicles

Aircraft

Watercraft

Plant and Equipment

Capital work-in-progress. Incomplete construction work is stated at historic cost.

Depreciation only commences when the asset is available for use.

8.2 Classification and identification of Assets (a) Definitions and rules

Fixed asset categories

Property, plant and equipment (which is broken down into groups of assets of a similar

nature or function in the municipality’s operations) (GRAP 17);

Heritage assets (GRAP 103);

Intangible assets (GRAP 31);

Biological assets (GRAP 102/27);

Capital Finance Lease assets (GRAP 13); and

Investment property (GRAP 16).

Class of PPE

A class of PPE is defined as a group of assets of a similar nature or function in the municipality’s

operations. The total balance of each class of assets is disclosed in the notes to the financial

statements.

PPE Asset hierarchy

An asset hierarchy is adopted for PPE which enables separate accounting of parts (or

components) of the asset that are considered significant to the municipality from a financial

point of view, and for other reasons determined by the municipality, including risk management

(in other words, taking into account the criticality of components) and alignment with the


Page 24

strategy adopted by the municipality in asset renewal (for example the extent of replacement or

rehabilitation at the end of life). In addition, the Municipality may aggregate relatively

insignificant items to be considered as one asset. The structure of the hierarchy recognizes the

functional relationship of assets and components.

PPE: Infrastructure

Infrastructure assets are immoveable assets which are part of a network of similar assets that

jointly provide service potential.

PPE: Community Property

Community property assets are immoveable assets contributing to the general well-being of the

community, such as parks, libraries, fire stations community halls and recreation facilities.

PPE: Building Property

PPE building property assets are buildings that are used for municipal operations such as

administration buildings and rental stock or housing not held for capital gain.

PPE: Other Assets

Movable assets are by nature stand-alone assets which are not directly attached or associated

with an item of immovable assets and are utilized in an enabling or assisting role on a day-to-

day basis.

Heritage assets

Heritage assets are assets of cultural, historic or environmental significance, such as

monuments, nature reserves, and works of art. Some heritage assets have more than one

purpose, e.g. a historical building which, in addition to meeting the definition of a heritage asset,

is also used as office accommodation. The municipality must use its judgment to make such an

assessment. The asset should be accounted for as a heritage asset if, and only if, the definition

of a heritage asset is met, and only if an insignificant portion is held for use in the production or


Page 25

supply of goods or services or for administrative purposes. If a significant portion is used for

production, administrative purposes or supply of services or goods, the asset shall be accounted

for in accordance with the Standard of GRAP on PPE.

Intangible assets

Intangible assets are defined as identifiable non-monetary assets without physical substance.

Examples are licenses/rights, (such as water licenses), servitudes, and software.

An asset meets the criterion of being identifiable in the definition of an intangible asset when it:

a) is separable, i.e. is capable of being separated or divided from the municipality and sold,

transferred, licensed, rented or exchanged, either individually or together with a related

contract, asset or liability, or

b) arises from contractual rights (including rights arising from binding arrangements) or other

legal rights (excluding rights granted by statute), regardless of whether those rights are

transferable and separable from the municipality or from other rights and obligations.

However, if the municipality is of the opinion that even though a servitude may meet the

definition of an intangible asset, it is essential to the operation of a tangible asset. For example,

where the municipality would not be able to construct or operate infrastructure on land that it

does not own without acquiring certain rights from the landowner. Therefore, the municipality

may be of the opinion that it would be more appropriate to include the cost of the servitude in

the cost of the tangible asset rather than recognizing a separate intangible asset. In such cases

servitudes will be accounted for as PPE by applying GRAP 17, and componentization may be

required as the values, nature and the useful life of the servitude and the tangible asset are

Different.

Servitudes

Where municipalities establish servitudes as part of the registration of a township, the associated

rights are granted in statute and are specifically excluded from the standard on intangible

assets. Such servitudes cannot be sold, transferred, rented or exchanged freely and are not


Page 26

separable from the municipality. Consequently, such servitudes are not recognized in the asset

register.

Servitudes that are created through acquisition (including by way of expropriation or agreement)

can be recognized as an intangible asset at cost. The municipality may include the servitude in

the cost of the PPE if it is essential to the construction or operation of the asset (such as in the

case of pipes).

Investment property

Investment property is defined as property (land and/or a building, or a part thereof) held (by

the owner or the lessee under a finance lease) to earn rentals or for capital appreciation, or both

(rather than for use in the production or supply of goods or services or for administration

purposes or sale in the ordinary course of operations). An example of investment property is

office parks that are rented out. There is no asset hierarchy for investment property; each

functional item will be individually recorded. Land held for a currently undetermined use is

recognized as investment property until such time as the use of the land has been determined.

A property is only classified as investment property if the main purpose and most significant use

of the property is to earn rental or for capital appreciation. For example, when a municipality

owns a building, mainly used for the delivery of social housing but rents out a floor of the

building to shops, banks and other external parties, the building should be accounted for as

property, plant and equipment as its main purpose and most significant use is the provision of

social services. This should be the case irrespective of whether the rental earned from the one

floor of the building is significant in relation to the rental earned from the remainder of the

building.

8.2.1 Identification of assets


Page 27

The MM shall ensure that Council maintains a fixed asset identification system which shall

be operated in conjunction with its computerized FAR.

The identification system shall be determined by the MM, acting in consultation with the

CFO and other General Manager of departments, and shall comply with any legal

prescriptions, as well as any requirements of the Auditor-General, and shall be decided upon

within the context of the Council's budget.

General Managers of the department shall ensure that the asset identification system

approved by Council is scrupulously implemented in respect of all fixed and movable assets

controlled or used by the department.

8.2.3 Verification of assets

The Asset Management Section shall at least once during every financial year provide all

General Managers of department with a comprehensive list of assets which is registered

under their control.

General Managers of departments shall be responsible for verifying this list with the assets

under their control and investigate any discrepancies arising out of the asset verification

exercise. General Managers of the departments will be required to sign and date a

declaration stating that the list of assets verified for his/her department is complete &

accurate except for the discrepancies as reported to the Asset Management Section.

8.2.4 Safekeeping of assets

Section 63 of the MFMA (Act no 56 2003) determines that the Municipal Managerof the

Council is responsible for the management of the assets of the Council, including the

safeguarding and the maintenance of those assets.

Section 78 of the MFMA (Act no 56 2003) determines each senior manager of Council and

each official of the Council exercising financial management responsibilities must take all


Page 28

reasonable steps within their respective areas of responsibility to ensure that the assets and

liabilities of Council are managed effectively and that assets are safeguarded and

maintained to the extent necessary.

Every General Manager of a department shall be directly responsible for the physical

safekeeping of any fixed asset controlled or used by his/her department.


Page 29

8.3. MEASUREMENT AT RECOGNITION (a) Definitions and rules

Measurement at recognition of PPE

An item of PPE that qualifies for recognition is measured at cost. Where an asset is acquired

through a non-exchange transaction (for example in the case of donated or developer-

created assets), its cost is deemed to be its fair value at the date of acquisition. In cases

where it is impracticable to establish the cost of an item of PPE, such as on recognizing PPE

for which there are no records, or records cannot be linked to specific assets, its cost is

deemed to be its fair value.

Measurement at recognition of investment property

Investment property will be measured at cost including transaction cost at initial

recognition. However, where an investment property was acquired through a non-exchange

transaction (i.e. where the investment property was acquired for no or nominal value), its

cost is its fair value at the date of acquisition.

Measurement at recognition of intangible assets

Intangible assets will be measured at cost at initial recognition. Where assets are acquired

for no or nominal consideration, the cost is deemed to equal the fair value of the asset on

the date acquired.

Measurement at recognition of heritage assets

Heritage assets will be measured at cost at initial recognition. Where assets are acquired for

no or nominal consideration, the cost is deemed to equal the fair value of the asset on the

date acquired.

If the municipality holds an asset that might be regarded as a heritage asset but which, on

initial recognition, does not meet the recognition criteria of a heritage asset because it


Page 30

cannot be reliably measured, relevant and useful information about it shall be disclosed in

the notes to the financial statements as follows:

A description of the heritage asset or class of heritage assets.

The reason why the heritage asset or class of heritage assets could not be measured

reliably.

On disposal of the heritage asset or class of heritage assets, the compensation

received and the amount recognized in the statement of financial performance.

Measurement at recognition of biological assets

Biological assets shall be measured on initial recognition and at each reporting date at its

fair value less costs to sell.

Fair value

Fair value is defined as the amount for which an asset could be exchanged, or a liability

settled, between knowledgeable, willing parties in an arm’s length transaction. Market based

evidence by appraisal can be used where there is an active and liquid market for assets (for

example land and some types of plant and equipment). In the case of specialized buildings

(such as community buildings) and infrastructure where there is no such active and liquid

market, a depreciated replacement cost (DRC) approach may be used to identify the fair

value. The appraisal of the fair value of assets is normally undertaken by a member of the

valuation profession, who holds a recognized and relevant professional qualification and has

appropriate knowledge and experience in valuation of the respective assets.

Cost of an item of PPE

The capitalization value comprises of:

(i) the purchase price including import duties and non-refundable purchase taxes, after

deducting trade discounts and rebates and


Page 31

(ii) any directly attributable costs necessary to bring the asset to its location and condition

necessary for it to be operating in the manner intended by the municipality, plus

(iii) an initial estimate of the costs of dismantling and removing the item and restoring the

site on which it is located.

VAT is excluded (unless the municipality is not allowed to claim input VAT paid on purchase

of such assets - in such an instance, the municipality should capitalize the cost of the asset

together with VAT).

Directly attributable costs

Directly attributable costs are defined as:

Cost of employee benefits arising directly from the construction or acquisition of the

item.

costs of site preparation;

initial delivery and handling;

installation and assembly costs;

commissioning (cost of testing the asset to see if the asset is functioning properly,

after deducting the net proceeds from selling any item produced while bringing the

asset to its current condition and location);

professional fees (for example associated with design fees, supervision, and

environmental impact assessments) (in the case of all asset classes); and

Proper transfer taxes (in the case of all asset classes).

Costs associated with heritage assets

Costs incurred to enhance or restore a heritage asset to preserve its indefinite useful life

should be capitalized as part of the cost of the asset. Such costs should be recognized in the

carrying amount of the heritage asset as incurred.

Depreciated replacement cost


Page 32

If no evidence is available to determine the market value in an active and liquid market of

an item of property, the fair value of the item may be established by reference to other

items with similar characteristics, in similar circumstances and location. In many cases, the

depreciated replacement cost of an asset can be established by reference to the buying

price of a similar asset with similar remaining service potential in an active and liquid

market. In some cases, an asset’s reproduction cost will be the best indicator of its

replacement cost. For example, in the event of loss, a parliament building may be

reproduced rather than replaced with alternative accommodation because of its significance

to the community.

Changes in the existing decommissioning or restoration cost included in the cost of an item

Most PPE are considered assets in perpetuity in that they will generally be renewed or

replaced at the end of their useful life. In the event that there is a statutory (and material)

obligation to decommission or restore an asset at the end of its useful life (such as at a

landfill site), provision has to be made for such costs. Changes in the measurement of an

existing decommissioning cost or restoration cost as a result of changes in the estimated

timing or amount of the outflow of resources embodying economic benefits or service

potential required to settle the obligation, should be treated as follows:

1. If the cost model is used -

Changes in the liability shall be added to or deducted from the cost of the related

asset.

If the amount deducted from the cost of the asset exceeds the carrying amount of

the asset, the excess shall be recognized immediately in surplus or deficit.

If the adjustment results in an addition to the cost of an asset, the municipality

should consider whether this is an indication that the carrying amount may not be

recoverable. In this case the municipality should test the asset for impairment.

2. If the revaluation model is used -


Page 33

A decrease in the liability shall be credited to the revaluation surplus, except that it

shall be recognized in the surplus or deficit to the extent that it reverses a

revaluation deficit on the asset that was previously recognized in the surplus or

deficit; and

An increase in the liability shall be recognized in surplus or deficit, except that it shall

be debited to the revaluation surplus to the extent that any credit balance may exist

in the revaluation surplus in respect of the asset.

If the decrease in liability exceeds the carrying amount that would have been

recognized if the asset has been carried under the cost model, the excess shall be

recognized immediately in the surplus or deficit.

If the change in liability is an indication that the asset may have to be re-valued in

order to ensure that the carrying amount does not differ materially from that which

would be determined using fair value at the reporting date. Any such revaluation

shall be taken into account in determining the amounts to be taken to surplus or

deficit and net assets as discussed above. If a revaluation is necessary, all assets of

that class shall be revalued.

The change in the revaluation surplus arising from the change in the liability shall be

separately identified and disclosed in the face of the statement of changes in net

assets.

Exchanged PPE assets

In cases where assets are exchanged, the cost is deemed to be the fair value of the

acquired asset and the disposed asset is de-recognized. If the acquired asset is not

measured at its fair value, its cost price will be the carrying amount of the asset given up.

Finance leases

A finance lease is recognized by the municipality (the lessee) at the commencement of a

lease term as an asset and liability in the statement of financial position at amounts equal

to the fair value of the leased property or, if lower, the present value of the minimum lease

payments, each determined at the inception of the lease.


Page 34

The discount rate to be used in calculating the present value of the minimum lease

payments is the interest rate implicit in the lease contract, if this is practicable to

determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct

cost of the lessee is added to the amount recognized as an asset.

Self-constructed immovable PPE

Self-constructed assets relate to all assets constructed by the municipality itself or another

party on instructions from the municipality. All assets that can be classified as immovable

assets and that are constructed by the municipality should be recorded in the asset register

and each component that is part of this asset should be depreciated over its estimated

useful life for that category of asset.

Proper records should be kept such that all costs associated with the establishment of these

assets are completely and accurately accounted for as capital under construction, and upon

completion of the asset, all costs (both direct and indirect) associated with the construction

of the asset are aggregated and capitalized in the asset register.

Construction of future investment property

If property is developed for future use as an investment property, such property shall in

every respect be accounted for as investment property.

Borrowing costs

Borrowing costs are interest and other costs incurred by the municipality from borrowed

funds. The items that are classified as borrowing costs include interest on bank overdrafts

and short-term and long-term borrowings, amortization of premiums or discounts

associated with such borrowings, amortization of ancillary costs incurred in connection with

the arrangement of borrowings; finance charges in respect of finance leases and foreign

exchange differences arising from foreign currency borrowings when these are regarded as

an adjustment to interest costs.

The municipality has the option to recognize all borrowing costs as an expense in the period

in which they are incurred, or if the allowed alternative is selected, the municipality shall


Page 35

recognize borrowing costs that are directly attributable to the acquisition, construction, or

production of a qualifying asset as part of the cost of that asset. Where the municipality

adopts the allowed alternative treatment, that treatment shall be applied consistently to all

borrowing costs that are directly attributable to the acquisition, construction, or production

of all qualifying assets of the municipality.

Deferred payment

The cost of an asset is the cash equivalent at the recognition date. If the payment of the

cost price is deferred beyond normal credit terms, the difference between the cash price

equivalent (the total cost price is discounted to the asset’s present value as at the

transaction date) and the total payment is recognized as an interest expense over the

period of credit unless such interest is recognized in the carrying value of the asset in

accordance with the Standard on Borrowing Costs, GRAP 5.

(b) Policy statement

PPE, intangible assets and investment property that qualify for recognition shall be

capitalized at cost. Interest on deferred payments will be capitalized to the extent to which

it relates to a qualifying asset. Biological assets that qualify for recognition shall be

capitalized at fair value less costs to sell.

In cases where complete cost data is not available or cannot be reliably linked to specific

assets: -

The fair value of PPE infrastructure, community facilities, building property shall be

adopted on the basis of depreciated replacement cost.

If the cost of heritage assets cannot be measured reliably, this should be disclosed in

the notes to the financial statements together with a description of the nature of the

asset.

Investment property and intangible assets (associated with immovable assets) shall

be measured at fair value on date of acquisition. If no fair value can be allocated to

the intangible asset, the asset will not be recognized as an asset.


Page 36

8.4. MEASUREMENT AFTER RECOGNITION (a) Definitions and rules

Options

Accounting standards allow measurement after recognition of assets as follows:

PPE, heritage assets and intangible assets: on either a cost or revaluation model;

and

Investment Property: either cost model or the fair value model.

Different models can be applied, providing the treatment is consistent per asset class.

asset.

Cost model


Page 37

When the cost model is adopted, a fixed asset is carried after recognition at its cost less any

accumulated depreciation and any accumulated impairment losses.

Revaluation model

When the revaluation model is adopted an asset is carried after recognition at a re-valued

amount, being its fair value at the date of revaluation less any subsequent accumulated

depreciation and subsequent accumulated impairment losses. Revaluations are made with

sufficient regularity to ensure that the carrying amount does not differ materially from that

which would be determined using fair value at the reporting date. When revaluations are

conducted, the entire class of assets should be re-valued.

If the carrying amount of an asset is increased as a result of a revaluation, the increase

shall be credited directly to a revaluation surplus. However, the increase shall be recognized

in surplus or deficit to the extent that it reverses a revaluation decrease of the same asset

previously recognized in surplus or deficit.

If the carrying amount of an asset is decreased as a result of a revaluation, the decrease

shall be recognized in surplus or deficit. However, the decrease shall be debited directly in

net assets to the extent of any credit balance existing in the revaluation surplus in respect

of that asset. The decrease recognized directly in net assets reduces the amount

accumulated in net assets under the heading revaluation surplus.

When an asset is revalued, any accumulated depreciation at the date of the revaluation is

treated in one of the following ways:

Restated proportionately with the change in the gross carrying amount of the asset

after revaluation equals its revalued amount. This method is often used when an

asset is revalued by means of applying an index to its depreciated replacement cost.

Eliminated against the gross carrying amount of the asset and the net amount

restated to the revalued amount of the asset.

The revaluation surplus is transferred to the Accumulated Surpluses/ (Deficits) Account on

de-recognition of an asset. An amount equal to the difference between the new (enhanced)

depreciation expense and the depreciation expenses determined in respect of such asset

before the revaluation in question may be transferred from the Revaluation Reserve to the


Page 38

municipality’s Accumulated Surplus/Deficit Account. An adjustment of the aggregate

transfer is made at the end of each financial year.

Investment property

When the fair value model is adopted, all investment property should be measured at its fair

value except when the fair value cannot be determined reliably on a continuing basis. The

gain or loss from the change in fair value of investment property shall be included in the

surplus or deficit for the period in which it arises. The fair value of the investment property

shall reflect market conditions at the reporting date. Investment property shall be valued on

an annual basis when the fair value model is adopted. All fair value adjustments shall be

included in the surplus or deficit for the financial year. If a municipality selects the cost

model to measure all of its investment property, it does so in accordance with the Standard

of GRAP on Property, Plant and Equipment, i.e., at cost less any accumulated depreciation

and any accumulated impairment losses.

Statutory inspections

The cost of a statutory inspection that is required for the municipality to continue to operate

immovable PPE is recognized at the time the cost is incurred, and any remaining carrying

amount of the cost of the previous inspection is de-recognized.

Major inspection

Major inspections will be recognized at the value of the major inspection

Expenses to be capitalized

Expenses incurred in the enhancement of PPE (in the form of improved or increased

services or benefits flowing from the use of such asset), or in the material extension of the

useful operating life of assets are capitalized. Such expenses are recognized once the

municipality has beneficial use of the asset (be it new, upgraded, and/or renewed) – prior to

this, the expenses are recorded as work-in-progress. Expenses incurred in the maintenance

or repair (reinstatement) of PPE that ensures that the useful operating life of the asset is


Page 39

attained, are considered as operating expenses and are not capitalized, irrespective of the

quantum of the expenses concerned.

Spares

The location of capital spares shall be amended once they are placed in service, and re-

classified to the applicable immovable PPE asset sub-category. Depreciation on the capital

spares will commence once the items are placed in service as this is when they are in the

location and condition necessary for them to be capable of operating in the manner

intended by management.

b) Policy statement

Measurement after recognition shall be on the following basis: -

PPE: cost model.

Heritage assets: cost model.

Investment property: Cost model

Intangible assets: cost model.

8.5 DEPRECIATION (a) Definition and rules

Depreciation


Page 40

Depreciation is the systematic allocation of the depreciable amount of an asset over its

remaining useful life. The amortization of intangible assets is identical.

Land and servitudes are considered to have unlimited life; therefore, they are not depreciated.

Heritage assets and are also not depreciated.

Depreciable amount

The depreciable amount is the cost of an asset, or other amount substituted for cost, less its

residual value.

Residual value

The residual value is the estimated amount that the municipality would currently obtain from

disposal of the asset after deducting the estimated costs of disposal, if the asset was already of

the age and in the condition expected at the end of its useful life.

The residual values of assets are indicated in Annexure C and D in the form of a percentage. In

the case of assets measured after recognition on the cost model, the percentage is of the initial

cost of acquisition. In the case of assets measured after recognition on the revaluation model,

the percentage is of the modern equivalent replacement value.

Depreciation method

Depreciation of PPE is applied at the component level. A range of depreciation methods exist and

can be selected to model the consumption of service potential or economic benefit (for example

the straight line method, diminishing amount method, fixed percentage on reducing balance

method, sum of the year digits method, production unit method). The approach used should

reflect the consumption of future economic benefits or service potential, and should be reviewed

annually where there has been a change in the pattern of consumption.

Remaining useful life


Page 41

The remaining useful life of a depreciable PPE asset is the time remaining until an asset ceases

to provide the required standard of performance or economic usefulness.

The remaining useful life of all depreciable immovable PPE assets at initial recognition is the

same as the expected useful life indicated in Annexure A. These figures have been established

using available information on industry norms, experience of local influencing factors (such as

climate, geotechnical conditions, and operating conditions), the life-cycle strategy of the

municipality, potential technical obsolescence, and any legal limits on the use of the immovable

assets.

Intangible assets with an indefinite useful life

An intangible asset with an indefinite useful life will not be amortized. Impairment testing shall

be performed on these assets on an annual basis and whenever there is an indication that the

assets might be impaired, comparing its recoverable amount with its carrying amount.

Remaining useful life

The remaining useful life (RUL) of a depreciable PPE asset is the time remaining until an asset

ceases to provide the required standard of performance or economic usefulness.

The remaining useful life of all depreciable immovable PPE assets at initial recognition is the

same as the expected useful life. The remaining useful life of all depreciable movable PPE assets

that are new, or are considered to have been renewed, at initial recognition is the same as the

expected useful life.

Annual review of remaining useful life

The remaining useful lives of depreciable PPE are reviewed every year at the reporting date.

Changes may be required as a result of new, updated or more reliable information being

available. Changes may also be required as a result of impairments. Depreciation charges in the

current and future reporting periods are adjusted accordingly, and are accounted for as a change

in an accounting estimate.

Depreciation method


Page 42

Depreciation of PPE is applied at the component level. A range of depreciation methods exist and

can be selected to model the consumption of service potential or economic benefit (for example

the straight line method, diminishing amount method, fixed percentage on reducing balance

method, sum of the year digits method, production unit method). The approach used should

reflect the consumption of future economic benefits or service potential, and should be reviewed

annually where there has been a change in the pattern of consumption.

Depreciation charge

Depreciation starts once an asset is available for use, when it is in the location and condition

necessary for it to be capable of operating in the manner intended by management. Depreciation

of an assets ceases at the earlier of the date that the asset is classified as held for sale (in

accordance with the standard of GRAP on Non-Current Assets Held for Sale and Discontinued

Operations) and the date the asset is derecognized.

Carrying amount

The carrying amount is the cost price / fair value amount after deducting any accumulated

depreciation and accumulated impairment losses.

Capital spares

Depreciation on capital spares will commence once the items are placed in service as this is

when they are in the location and condition necessary for them to be capable of operating in the

manner intended by management.

Finance lease Depreciable assets financed through a finance lease will give rise to a depreciation expense and

finance cost which will occur for each accounting period. The depreciation policy for depreciable

leased assets shall be consistent with the policy of depreciable owned assets, and the

depreciation recognized shall be calculated in accordance with the Standard on Property, Plant

and Equipment, GRAP 17. If there is no reasonable certainty that the municipality will obtain


Page 43

ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of

the lease term and its useful life. If there is certainty that the municipality will obtain ownership

by the end of the lease term, the asset will be fully depreciated over the asset’s useful life.


All PPE, except land, servitudes and heritage assets, shall be depreciated over their remaining

useful lives. All intangible assets, other than intangibles with an indefinite useful life, shall be

amortized over their remaining useful lives. All investment property, excluding land, shall be

depreciated over their remaining useful lives. The method of depreciation / amortization shall be

reviewed on an annual basis, though the straight line basis shall be used in all cases unless

Council determines otherwise. The existence, remaining useful lives and residual values shall

also be reviewed at each reporting date.


Page 44

8.6. IMPAIRMENT (a) Definition and rules

Impairment

Impairment is defined as the loss in the future economic benefits or service potential of an

asset, over and above the systematic recognition of the loss of the asset’s future economic

benefits or service potential through depreciation.

Indications of impairment

The municipality must review assets for impairment when one of the indicators below occurs

or at least at the end of each reporting period. In assessing whether there is any indication

that an asset may be impaired, the municipality shall consider as a minimum the following

indicators:

I. External sources of information:

decline or cessation in demand;

Significant long-term changes in the technological, legal or government policy

environment;

the carrying amount of the net assets of the municipality is more than its market

capitalization; or

Market interest rates have increased during the period, and those increases are likely

to affect the discount rate used in calculating an asset’s value in use and decrease

the asset’s recoverable amount materially.


Page 45

A halt in construction could indicate an impairment. Where construction is delayed or

postponed to a specific date in the future, the project may be treated as work in

progress and not considered as halted.

ii. Internal sources of information:

evidence of physical damage;

evidence of obsolescence;

significant changes with an adverse effect on the municipality have taken place

during the period, or are expected to take place in the near future, in the extent to

which, or a manner in which, an asset is used or is expected to be used, including an

asset becoming idle, plans to dispose of an asset before the previously expected

date, and reassessing the useful life of an asset as finite rather than indefinite;

cash flow for acquiring an asset or maintenance cost thereafter is higher than

originally budgeted;

the actual net cash flow or operating profit or loss flowing from an asset are

significantly worse than those budgeted;

a significant decline in budgeted net cash flow or operating profit, or a significant

increase in the budget loss, flowing from the asset; or

Operating losses or net cash outflows for the asset, when current period amounts are

aggregated with budgeted amounts for the future.

iii. Other indications, such as loss of market value.

Impairment of projects under construction

In assessing whether a halt in construction would trigger an impairment test, it should be

considered whether construction has simply been delayed or postponed, whether the

intention to resume construction in the near future or whether the construction work will not

be completed in the foreseeable future. Where construction is delayed or postponed to a

specific future date, the project may be treated as work in progress and is not considered as

halted.


Page 46

Intangible assets

The municipality must test all intangible assets associated with immovable PPE not yet

available for use or which have an indefinite useful life for impairment. This impairment test

may be performed at any time during the reporting period provided it is performed at the

same time every year.

Investment property on the cost model

Investment property that is measured at cost less any accumulated depreciation and any

accumulated impairment losses must be tested for impairment. This impairment test may

be performed at any time during the reporting period provided it is performed at the same

time every year.

Recoverable amount

This is the estimated amount which the municipality expects to obtain for an asset at the

end of its useful life after deducting the expected costs of disposal.

The events and circumstances in each instance must be recorded. Where there are

indications of impairment, the municipality must estimate the recoverable service amount of

the asset and also consider adjustment of the remaining useful life, residual value, and

method of depreciation.

Value in use

It is the present value of estimated future cash flows expected to arise from the continuing

use of an asset and from its disposal at the end of its useful lives.

Impairment loss

An impairment loss of a non-cash-generating unit or asset is defined as the amount by

which the carrying amount of an asset exceeds its recoverable service amount. The

recoverable service amount is the higher of the fair value less costs to sell and its value in

use.


Page 47

An impairment loss of a cash-generating unit (smallest group of assets that generate cash

inflows) or asset is the amount by which the carrying amount of an asset exceeds its

recoverable amount. The recoverable amount is the higher of the fair value less costs to sell

and its value in use.

Non-cash-generating units

Non-cash-generating units are those assets (or group of assets) that are not held with the

primary objective of generating a commercial return. This would typically apply to assets

providing goods or services for community or social benefit. The recoverable amount is the

higher of the asset’s fair value less cost to sell and its value in use. It may be possible to

determine the fair value even if the asset is not traded in an active market. If there is no

binding sales agreement or active market for an asset, the fair value less cost to sell is

based on the best information available to reflect the amount that the municipality could

obtain. However, sometimes it will not be possible to determine the fair value less cost to

sell because there is no basis for making reliable estimates of the amount obtainable. For

non-cash generating assets which are held on an on-going basis to provide specialized

services or public goods to the community, the value in use of the assets is likely to be

greater than the fair value less cost to sell. In such cases the municipality may use the

asset’s value in use as its recoverable service amount. The value in use of a non-cash

generating unit/asset is defined as the present value of the asset’s remaining service

potential.

This can be determined using any of the following approaches:

the Depreciated Replacement Cost (DRC) approach (and where the asset has

enduring and material over-capacity, for example in cases where there has been a

decline in demand, the Optimized Depreciated Replacement Cost (ODRC) approach

may be used);

the restoration cost approach (the Depreciated Replacement Cost less cost of

restoration) – usually used in cases where there has been physical damage; or

The service units’ approach (which could be used for example where a production

units’ model of depreciation is used).


Page 48

Where the present value of an asset’s remaining service potential (determined as indicated

above) exceeds the carrying value, the asset is not impaired – this will normally be the case

unless there has been a significant event as indicated above.

Cash-generating units

Cash-generating units are those assets held with the primary objective of generating a

commercial return. An asset generates a commercial return when it is deployed in a manner

consistent with that adopted by a profit-oriented entity. Holding an asset to generate a

“commercial return” indicates that the municipality intends to generate positive cash inflows

from the asset (or from part of the cash-generating unit of which the asset is a part) and

earn a commercial return that reflects the risk involved in holding the asset. When the cost

model is adopted, fair value is determined in accordance with the rules indicated for

measurement after recognition. Costs to sell are the costs directly attributable to the

disposal of the asset (for example agents fees, legal costs), excluding finance costs and

income tax expenses. The value in use is determined by estimating the future cash inflows

and outflows from the continuing use of the asset and net cash flows to be received or

(paid) for the disposal of the assets at the end of its useful life, including factors to reflect

risk in the respective cash-flows and the time value of money.

Judgment

The extent to which the asset is held with the objective of providing a commercial return

needs to be considered to determine whether the asset is a cash generating or non-cash

generating asset. An asset may be held with the primary objective of generating a

commercial return even though it does not meet that objective during a particular reporting

period. Conversely, an asset may be a non-cash-generating asset even though it may be

breaking even or generating a commercial return during a particular reporting period. In

some cases, it may not be clear whether the primary objective of holding an asset is to

generate a commercial return. In such cases it is necessary to evaluate the significance of

the cash flows. It may be difficult to determine whether the extent to which the asset


Page 49

generates cash flows is so significant that the asset is a non-cash-generating- or a cash-

generating asset. Judgment is needed in these circumstances.

Recognition of impairment

The impairment loss is recognized as an expense when incurred (unless the asset is carried

at a re-valued amount, in which case the impairment is carried as a decrease in the

Revaluation Reserve, to the extent that such reserve exists). After the recognition of an

impairment loss, the depreciation charge for the asset is adjusted for future periods to

allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic

basis over its remaining useful life.

When no future economic benefit is likely to flow from an asset, it is derecognized and the

carrying amount of the asset at the time of de-recognition, less any economic benefit from

the de-recognition of the asset, is debited to the Statement of Financial Performance as a

“Loss on Disposal of Asset”.

In the event of compensation received for damages to an item of immovable PPE, the

compensation is considered as the asset’s ability to generate income and is disclosed under

Sundry Revenue; and the asset is impaired/ de-recognized.

Reversing an impairment loss

The municipality must assess each year from the sources of information indicated above

whether there is any indication that an impairment loss recognized in previous years may

no longer exist or may have decreased. In such cases, the carrying amount is increased to

its recoverable amount (providing that it does not exceed the carrying amount that would

have been determined had no impairment loss been recognized in prior periods). Any

reversal of an impairment loss is recognized as a credit in surplus or deficit.


The municipality considers itself the municipality whose primary objective is to provide

goods and services for community or social benefit, and where positive cash flows are

generated (such as from sale of trading services such as water services), these are with the


Page 50

view to support the primary objective rather than for financial return to equity holders.

Consequently, the municipality adopts the impairment treatment for non-cash generating

units in the impairment of its PPE and associated intangible assets.

Impairment of assets shall be recognized as an expense in the Statement of Financial

Performance when it occurs or at least at every reporting date. Ad-hoc impairment shall be

identified as part of normal operational management as well as scheduled annual

inspections of the assets.

9 Disposal of assets

9.1 Disposal

In compliance with the principles and prescriptions of the Municipal Finance Management

Act the transfer of ownership of any fixed asset shall be fair, equitable, transparent,

competitive and consistent with Council’s supply chain management policy.

General Managers of the Departments shall report to the CFO annually on all fixed assets

controlled or used by the department concerned which such General Manager of a

Department wishes to dispose of such assets by public auction or public tender within the

period up to 30 June of the next financial year. The CFO shall thereafter consolidate the

requests received from the various departments, and shall promptly report such

consolidated information to the Disposal Committee prior to being reported to Council or the

Municipal Manager, as the case may be, recommending the process of disposal to be

adopted.

Any items declared obsolete or damaged will be handed in to the Asset Management Section

for safekeeping.


Page 51

Each Department must take the necessary steps to ensure that all their obsolete or

damaged assets are disposed of in the correct and approved manner. It is the responsibility

of each Department to ensure that all such assets to be disposed of are delivered to and

received at the Asset Management Section.

The Council shall ensure that the disposal of any fixed asset takes place in compliance with

Section 14 of the Municipal Finance Management Act 2004 and the Supply Chain

Management Policy.

Every General Manager of a department shall ensure that any incident of loss, theft,

destruction, or material impairment of any fixed asset controlled or used by the Department

in question is promptly reported in writing to the Insurance Section, the Asset Management

Section, and, in cases of suspected theft or malicious damage, also to the internal auditors,

South African Police Services. Once the fixed assets are disposed of, the CFO shall remove

the relevant records from the fixed asset register.

Transfer of fixed assets to other municipalities, municipal entities (whether or not under

Council's sole or partial control) or other organs of state shall take place in accordance with

the above procedures, except that the process of disposal shall be by private treaty.

All assets to be disposed of in the next financial period is to be transferred to the Non-

current assets held for sale account, revalued to the lower of cost and expected selling price

and to be disclosed on the Statement of Financial Position as Non-current assets held for

sale under Current assets and not as Property, plant and equipment under Non-current

assets.

9.2 Other write offs A fixed asset even though fully depreciated shall be written off only on the recommendation

of the General Manager/ Chief Financial officer of a department controlling or using the

asset concerned, and with the final approval of Council.


Page 52

Every General Manager of a department shall annually report to the CFO on any fixed assets

which such director of a department wishes to have written off, stating in full the reason for

such recommendation. The CFO shall consolidate all such reports and shall promptly submit

a recommendation to the Council on the fixed assets to be written off.

The only reasons for writing off fixed assets, other than the disposal of such fixed assets,

shall be the loss, theft, destruction, incorrect capitalizations or material impairment of the

fixed asset in question.

9.3 Proceeds /Gain or Loss on disposal of assets When assets are disposed of whether by disposal or written off the asset values needs to be

readjusted and offset against the proceeds. If the proceeds of the disposal are less than the

carrying value recorded in the fixed asset register, such difference shall be recognized as a

loss in the vote of the Department concerned. If the proceeds of the disposal, on the other

hand, are more than the carrying value of the fixed asset concerned, the difference shall be

recognized as a gain in the vote of the Department concerned.

If this asset has an outstanding balance on the Revaluation Reserve this balance must be

transferred to the Accumulated Surplus.

9.4 Disclosure of assets disposed of

The carrying value of the asset disposed of is removed from the records and will not reflect

on the Statement of Financial Position as part of the balance on Property, Plant and

Equipment under Non - Current assets

The gain or loss will be reflected in the Statement of Financial Performance as a gain under

Revenue or as a loss under Expenditure.


Page 53

Recognition of assets in the financial statements

Recognition is the process of incorporating in the Statement of Financial Position or

Statement of Financial Performance, an item that meets the definition and satisfies the

criteria for recognition.

Assets are classified into categories as set out in section 7 (Classification of Assets) and the

information for each category summarized in a table format is disclosed as:

a note to the financial statements;

with a detailed disclosure as an annexure reflecting the movements for the financial

year by category and subcategory;

movements are also reflected on an annexure per Department;

The net value (carrying value at year-end), for all categories is added together and

reflected as a single line item in the statement of financial position.

The failure to recognize such items is not rectified by disclosure of the accounting policies

used, or by notes or explanatory material.

To be able to assess the utilization of assets all assets should be listed once the recognition

criteria are met.

An asset item should be recognized in the financial statements if it meets the:

Probability criteria (it is probable that any future economic benefits or service

potential associated with the asset will flow to the Council);

Measurement criteria (the asset has a cost or value that can be measured with

reliability).

In many cases, cost or value must be estimated; the use of reasonable estimates is an

essential part of the preparation of financial statements and does not undermine their


Page 54

reliability. When, however, a reasonable estimate cannot be made, the item is not

recognized in the Statement of Financial Position or Statement of Financial Performance.

An item that possesses the essential characteristics of an asset but fails to meet the criteria

for recognition may nonetheless warrant disclosure in the notes, explanatory material or in

supplementary schedules. This is appropriate when knowledge of the item is considered to

be relevant to the evaluation of the financial position, performance and changes in financial

position of the Council by the users of financial statements.

No asset is recognized in the Statement of Financial Position for expenditure incurred where

it is improbable that economic benefit or service potential will flow to the Council beyond

the current financial year. Where the probability is low, such a transaction will result in the

recognition of an expense in the Statement of Financial Performance.

Where the expenditure has been incurred in connection with an asset already recognized,

consideration should be given to the probability that the expense will result in an extension

of the asset’s estimated useful life. If the probability is high the expense will be added to

the value of the asset in the Statement of Financial Position and written off by way of

depreciation over the remaining life of the asset.

Expenditure incurred on an existing asset that will not extend the useful life or the

functionality of the asset, will be reflected in the Statement of Financial Performance as an

expense (maintenance).

Assets may be acquired for safety or environmental reasons. The acquisition of such assets,

while not directly increasing the future economic benefits or service potential of any

particular existing asset, may be necessary in order for the Council to obtain the future

economic benefits or service potential from its other assets. When this is the case, such

acquisitions of assets qualify for recognition as assets, in that they enable future economic

benefits or service potential from related assets to be derived by the Council in excess of


Page 55

what it could derive if they had not been acquired. However, such assets are only

recognized to the extent that the resulting carrying amount of such an asset and related

assets does not exceed the total economic benefits or service potential that Council expects

to recover from their continued use and ultimate disposal.

10. Funding Sources

The main sources of finance utilized to acquire assets are:

Government and other conditional grants.

Conditional grants, Subsidies and Public Contributions and Donations

Cash surplus.

The sources of finance that may be utilized to finance assets are utilized in accordance with

the provisions of Section 19 of the Municipal Finance Management Act.

10.1 Government and other conditional grants

Whenever a conditional government or other grant for the acquisition of an asset is received

a grant liability is created on receipt of the funds. Once the asset is bought, an amount

equal to the cost of the asset is transferred from the unspent grant liability to the Statement

of Financial Performance as revenue.

Unspent conditional grants are reflected on the Statement of Financial Position under

current liabilities as Unspent Conditional Grants. These funds always have to be backed by

cash. The following conditions are set for the creation and utilization of these funds:


Page 56

The cash which backs up the grant is invested until it is utilized.

Interest earned on the investment is treated in accordance with grant

conditions. If it is payable to the funder it is recorded as part of the creditor. If the

conditions are silent on investment interest it is recognized as interest earned in the

Statement of Financial Performance and might be allocated, through the Statement

of Changes in Net Assets, in part or fully to the unspent portion of the grant if it is so

stated in the accounting policy.

Whenever an asset is acquired from a conditional grant an amount equal to

the cost of the asset is transferred from the Unspent grant creditor to the Statement

of Financial Performance as revenue.

The amount spent from this grant, meeting the condition, is transferred to

an operational revenue account and reflected on the Statement of Financial

Performance. It will then increase the surplus for the year and the accumulated

surplus representing an offset depreciation surplus.

Once the asset is available for use, it is included in the FAR and depreciation is calculated

based on the relevant useful life of the asset. Depreciation on the asset is then charged to

the Statement of Financial Performance as an expense.


Page 57

10.2 Finance leases A lease is classified as a finance lease if it meets the recognition requirements as per

GRAP 13 (Annexure C)

At the commencement of the lease term, the Council shall recognize finance leases as

assets and liabilities in the statement of financial position at amounts equal to the fair value

of the leased property or, if lower, the present value of the minimum lease payments, each

determined at the inception of the lease. The discount rate to be used in calculating the

present value of the minimum lease payments is the interest rate implicit to the lease, if

this is practicable to determine; if not, the Council’s incremental borrowing rate shall be

used. Any initial direct costs of the Council are added to the amount recognized as an asset.

10.3 Donations The fair value of donated assets must be determined and at receipt or transfer of the assets

be allocated to the accumulated surplus account.

Once the asset is available for use, it is included in the FAR and depreciation is calculated

based on the relevant useful life of the asset. Depreciation on the asset is then charged to

the Statement of Financial Performance as an expense.

10.4 Surplus cash If there is sufficient surplus cash available assets can be financed directly by allocating this

cash for the acquisition of assets. Depreciation charges on these assets will not be offset.


Page 58

11 Replacement Strategy

The Municipal Manager, in consultation with the CFO and other General Managers of

Department shall formulate strategies and standards for the replacement of all operational

property, plant and equipment. Such strategies and standards shall be incorporated in a

formal policy, which shall be submitted to the Council for approval. This policy shall cover

the replacement of infrastructure and operational movable vehicles and equipment.

This strategy should take into consideration:

The nature of the asset

The usage of the asset

Priorities

Available funding

Operational and maintenance costs

Operational skills

Future expected developments

Technology

Outsourcing

Private sector partnerships

12 Asset Risk Management

12.1 Insurance Departments are responsible for managing the risks associated with their activities.


Page 59

This decision will depend on the amount of excess the Council are prepared to carry, the

types of risks they insure against, taking due cognisance of the budgetary constraints of the

Council.

Complete property, plant and equipment identification and valuation may prevent the

Council from being over or under insured. Specific supportable insurable values are defined

in the insurance policy in effect and should be reviewed regularly. In some instances, an in-

house estimate of cost or insurable value may not be sufficient to substantiate the amount

of a loss. Rather, an appraisal by an independent third party may be required.

12.2 Other risk reducing methods Department regulations or "operating policies" can also reduce risks. Department managers

should investigate their operations and set operating policies as to how personnel should

operate and use property, plant and equipment to minimize risk. Examples are as follows:

Only authorized personnel should be allowed in areas where expensive

equipment is kept;

Only authorized personnel should be allowed to operate plant or vehicles;

The keys for office vehicles should be controlled in a central office during the

day, and employees should sign when they take the keys;

Ensure that drivers or operators have the necessary qualifications and

licenses;

It should be part of service conditions that employees incur personal liability

if they drive while under the influence of alcohol, drugs, medication, and so forth;

or if they leave the vehicle unattended and unlocked;

Physical access to buildings, or areas within buildings, should be restricted,

especially after hours.


Page 60

13 Maintenance of assets

13.1 Maintenance plans Regular maintenance can prevent unplanned and expensive breakdowns. Maintenance plans

must therefore be drawn up to ensure minimum maintenance standards and execution to

achieve the optimum use of assets as planned.

Every General Manager of a Department shall ensure that a maintenance plan in respect of

infrastructural asset is prepared and submitted to Council for approval.

If so directed by the Municipal Manager, the maintenance plan shall be submitted to

Council prior to any approval being granted for the acquisition or construction of new

infrastructural assets.

The General Manager of a Department controlling or using the infrastructure asset in

question, shall budget for the executing of the approved plan and will annually report to

Council of the extent to which the relevant maintenance plan has been complied with, and

of the likely effect which any non-compliance and / or budgetary constraints may have on

the useful operating life of the asset concerned.

13.2 Deferred Maintenance If there is material variation between the actual maintenance expenses incurred and the

expenses reasonably envisaged in the approved maintenance plan for any infrastructural

asset (see 18 above), the CFO shall disclose the extent of and possible implications of such

deferred maintenance in an appropriate note to the financial statements. Such note shall

also indicate any plans which the Council has approved in order to redress such deferral of

the maintenance requirements concerned.

If no such plans have been formulated or are likely to be implemented, the General

Manager of a Department controlling or using such asset shall re-determine the useful


Page 61

operating life of the fixed asset in question, if necessary in consultation with the Asset

Management Section, and the Asset Management Section shall recalculate the annual

depreciation expenses accordingly.

13.3 General maintenance Every General Manager of a Department shall be directly responsible for ensuring that all

assets that are in his/her care are properly maintained and in a manner which will ensure

that such assets attain their useful operating lives.

14 General Requirements

14.1 Bar coding Bar coding means to place a control number on a piece of equipment or property.

All movable assets must be bar code if probable.

The primary purpose of bar coding is to maintain a positive identification of assets.

Bar coding is important to:

Provide an accurate method of identifying individual assets

Aid in the annual physical inventory

Control the location of all physical assets

Aid in maintenance of fixed assets

Fixed property and plant is not bar coded; such as:

Buildings (record legal description in asset record),

Land (record legal description in asset record),


Page 62

Infrastructural assets.

Consistently place asset bar codes in the same location on each similar type asset. If

possible, the bar codes shall be accessible for viewing. Place the tag where the number can

be seen easily and identified without disturbing the operation of the item, which will aid in

taking inventory.

14.2 Physical inventory of all movable assets The Asset Management Section will conduct a physical inventory of movable assets

annually. They will require the cooperation of departmental personnel in accomplishing the

physical inventory task and will attempt to minimize the time demanded of them.

The designated officials in the different Departments within Council must execute the

functions listed below.

Ensure that the bar code number and location number are reflected on the

asset movement form by the relevant official on the receipt of the asset. Where

applicable, the serial number or registration number should be included.

Complete the asset movement form when transfers occur and forward the

completed original form to Asset Management Section.

Ensure that a completed asset disposal form is submitted when an asset

item is disposed of after the necessary approval has been obtained.

Asset Management Section must be notified by the relevant Department of

any of the following possible movements:

Donations

Additions / Improvements

Departmentally manufactured items

Loss or damage

Transfers

Terminations


Page 63

Land Sales

14.3 Acquisition Acquisition - In making the decision to acquire an asset the following fundamental principles

should be carefully considered:

The purpose for which the fixed asset is required is in keeping with the

objectives of Council and will provide significant, direct and tangible benefit to it.

The fixed asset has been budgeted for.

The purchase is absolutely necessary as there is no alternative municipality

asset that could be upgraded or adapted.

The fixed asset is appropriate to the task or requirement and is cost effective

over the life of the asset.

The fixed asset is compatible with existing equipment and will not result in

unwarranted additional expenditure on other assets or resources.

Space and other necessary facilities to accommodate the asset are in place.

The most suitable and appropriate type, brand, and model etc. has been

selected.

Departments should ensure that on acquisition of office furniture cost are

contained to minimal, avoiding elaborate and expensive furniture or equipment.

14.4 Asset management responsibilities

Utilization - All assets should be used for the purposes they were acquired.

Asset performance should be regularly reviewed to identify under-utilized

and under-performing assets. The reasons for this should be critically examined and

appropriate action taken.

Disciplinary action must be taken against individuals if there is misuse of the

Council’s assets.


Page 64

14.5 Additions / Improvements Depending upon the type of addition or improvement to a specific asset the responsible

official in the Department must notify the Asset Management Section of the change in status.

The asset master record will be amended on receipt of the required asset acquisition form

from the responsible Department.

When capital expenditure is incurred for any enhancement/improvement of an asset, the

Department shall complete the necessary asset acquisition form and forward it to the Asset

Control Section.

When any changes to vacant land or land and buildings are effected such as subdivision,

transfer to another Department, extent or holders title, the current owner must complete the

relevant asset movement form and forward it to the Asset Management Section.


Page 65

14.6 Termination of employee’s service At the termination of an employee’s service, the applicable Department representative must

complete the asset clearance form and forward the original to the Asset Management

Section. This form is a statement that the inventory and assets entrusted to the employee

to execute his/her daily duties are in good order and handed in where necessary. A copy of

this form is forwarded to the HR Business Section concerned or its relevant Department for

further investigation in the case of missing assets.

14.7 Transfer of Assets When a Department transfers an asset or inventory item within the Department, the asset

movement form must be completed and forwarded to the Asset Management Section. The

copy of this form must be forwarded to the party receiving the asset or inventory item.

When a Department transfers an asset or inventory item to another Department, the

transferring Department must approve the transfer. After approval has been granted the

asset movement form must be completed and forwarded to the Asset Management Section.

14.8 Disposal of assets All Departments must submit the properly completed asset disposal forms together with

copies of all relevant approvals for the disposal of assets to the Asset Management Section.

Annexure A Mbombela Local Municipality Asset Management Policy

Page 61

Annexure A

15. Asset Useful Live Guide

Infrastructure Assets

The following is the list of infrastructure assets, with the estimated useful life in years

indicated in brackets in each case.

Electricity

Power stations (30)

Cooling towers (30)

Transformer kiosks (30)

Meters (20)

Load control equipment (20)

Switchgear (20)

Supply and reticulation networks (20)

Mains (20)

Substations (20)

Festive Lighting (10)

Roads

Motorways (40)

Other roads (10)

Traffic islands (10)

Traffic lights (20)

Street lights (25)

Overhead bridges (30)

Storm water drains (20)

Bridges, subways and culverts (30)

Car parks (20)

Bus terminals (20)


Page 61

Parking Meters (15)

Parking Areas (10)

Guidance Signs (10)

Pedestrian Facilities (10)

Sidewalks (10)

Taxi Facilities (20)

Water

Mains (20)

Supply and reticulation networks (20)

Reservoirs and storage tanks (20)

Rights (that is, the right to draw water from

a particular source belonging to another party) (20)

Meters (15)

Water Treatment Works (20)

Dams (20)

Sewerage

Sewer mains (20)

Outfall sewers (20)

Sewage purification works (20)

Sewerage pumps (15)

Sludge machines (15)

Pedestrian Malls

Footways (20)

Kerning (20)

Paving (20)

Security

Access control systems (5)

Security systems (5)


Page 61

Security fencing (3)

Security lighting (3)

Community Assets The following is a list of community assets, showing again the assigned or estimated useful

lives in years in brackets:

Buildings and other assets

Agriculture (30)

Ambulance stations (30)

Aquariums (30)

Beachfront developments (30)

Care centers (30)

Cemeteries (30)

Civic theatres (30)

Clinics and hospitals (30)

Community centers (40)

Fire stations (30)

Game reserves and rest camps (30)

Indoor sports (30)

Libraries (40)

Museums and art galleries (30)

Parks (40)

Public conveniences and bath houses (30)

Recreation centers (30)

Sports and related stadiums (40)

Zoos (30)

Recreational facilities

Bowling greens (20)

Tennis courts (20)

Swimming pools (20)

Golf courses (20)


Page 61

Jackie pitches (20)

Outdoor sports facilities (20)

Organs (that is, pipe organs that are

Fixtures in a municipal hall or other Centre) (20)

Lakes and dams (20)

Fountains (20)

Floodlighting (20)

Heritage Assets

The following is a list of at least some typical heritage assets encountered in the

environment (no asset lives are given, of course, as no ordinary depreciation will be

charged against such assets):

Museum exhibits

Works of art (which will include paintings and sculptures)

Public statues

Historical buildings or other historical structures (such as war memorials)

Historical sites (for example, an Iron Age kiln, historical battle site or site of a

historical settlement)

Investment Assets

It is not possible to provide an exhaustive list of investment assets, as the actual list will

depend very much on the local circumstances of each municipality. However, the following

will be among the most frequently encountered:

Office parks (30)

Housing developments (that is, developments (40)


Page 61

Other Assets The following is a list of other assets, again showing the estimated useful life in years in

brackets:

Buildings

Abattoirs (30)

Asphalt plant (30)

Caravan parks (30)

Compost (30)

Compacting stations (30)

General (30)

Hawker Facilities (30)

Hostels used to accommodate the public or tourists (30)

Hostels for municipal employees (30)

Housing schemes (30)

Kilns (30)

Laboratories (30)

Fresh produce and other markets (30)

Nurseries (30)

Office buildings (40)

Old age homes (30)

Quarries (30)

Recycling Centers (30)

Tip sites (30)

Training centers (30)

Transport facilities (30)

Waste Cells (30)

Workshops and depots (30)


Page 61

Office equipment

Computer hardware (3-5)

Computer software (3-5)

Office machines (3-5)

Air Conditioners (3-5)

Furniture and fittings

Chairs (7-10)

Tables and desks (7-10)

General (7-10)

Cabinets and cupboards (7-10)

Bins and containers

Household refuse bins (5)

Bulk refuse containers (10)

Emergency equipment

Fire hoses (5)

Other fire-fighting equipment (15)

Emergency lights (5)

Motor vehicles

Ambulances (5-10)

Fire engines (20)

Tankers (20)

Mobile Libraries (15)

Buses (15)

Trucks and light delivery vehicles (5-7)

Ordinary motor vehicles (5-7)

Motor cycles (3)


Page 61

Plant and equipment

Chlorination Equipment (5)

Compactors (5)

Electronic Equipment (5)

Fire Hoses (5)

General (5)

Generators (5)

Graders (10-15)

Horticultural Equipment (5)

Mobile Pumps (5)

Other Fire Fighting Equipment (5)

Pumps (5)

Tractors (10-15)

Trailers (5)

Mechanical horses (10-15)

Farm equipment (5)

Lawn mowers (5)

Compressors (5)

Laboratory Equipment (5)

Radio Equipment (5)

Firearms (5)

Telecommunication equipment (5)

Irrigation systems (15)

Cremators (15)

Lathes (15)

Conveyors (15)

Feeders (15)

Tippers (15)

Workshop Equipment (5)

Pulverizing mills (15)

Airports


Page 61

Aircraft (15)

Aprons (20)

Runways (20)

Taxiways (20)

Airports/Radio beacons (20)

Gas

Meters (20)

Mains (20)

Storage tanks (20)

Supply/reticulation (20)

Annexure B Mbombela Local Municipality Draft Asset Management Policy

Page 79

Annexure B

Paraphrase of Section 14 of the Municipal Finance Management Act 2004

A municipality may not dispose of any capital asset required to provide a minimum level of

basic municipal services.

A municipality may dispose of any other capital asset, provided that:

Council, in a meeting open to the public, has first determined that the asset is not

required to provide a minimum level of basic municipal services, and

Council has considered the fair market value of the asset and the economic and

community value to be received in exchange for the asset.

Annexure C Mbombela Local Municipality Draft Asset Management Policy

2

Annexure C

GRAP 13 Definitions of Finance Leases

A lease must meet one of the following criteria to be classified as a finance lease:

the lease transfers ownership of the asset to the lessee by the end of the lease

term,

the lessee has the option to purchase the asset at a price which is expected to be

sufficiently lower than the fair value at the date the option becomes exercisable for

it to be reasonably certain, at the inception of the lease, that the option will be

exercised,

the lease term is for the major part of the economic life of the asset even if title is

not transferred,

at the inception of the lease the present value of the minimum lease payments

amounts to at least substantially all of the fair value of the leased asset,

the leased assets are of a such a specialized nature that only the lessee can use

them without major modifications, and

The leased assets cannot easily be replaced by another asset.

if the lessee can cancel the lease, the lessor’s losses associated with the

cancellation are borne by the lessee,

gains or losses from the fluctuation in the fair value of the residual accrue to the

lessee (for example, in the form of a rent rebate equaling most of the sales

proceeds at the end of the lease), and

The lessee has the ability to continue the lease for a secondary period at a rent that

is substantially lower than market rent.


3

16. Policy Review

This policy should be reviewed annually to ensure continued compliance with the relevant

legislation and accounting standards. Changes to this document shall only be applicable if

approved by Council. Any proposals in this regard shall be motivated by the CFO in

consultation with the MM and respective Heads of Department. The recommendations of the

CFO shall be considered for adoption by Council.

17. References

The following references were observed in compiling this document:

Asset Management Framework, National Treasury, 2004

Guidelines for Infrastructure Asset Management in Local Government, Department of

Provincial and Local Government, 2006

Municipal Finance Management Act, 2003

Disaster Management Act, 2002

Municipal Systems Act, 2000

Municipal Structures Act, 1998

Accounting Standards Board

MFMA Circular 18 & 44

Local Government Capital Asset Management Guidelines, National Treasury, 2008

Government Gazettes (30013 & 31021)

Generally, Recognized Accounting Practice (1-14, 16, 17, 19, 21, 23-27, 31 and 100-

104)

Interpretations of the standards of GRAP issued by the Accounting Standards Board

(ASB) (IGRAP 1- 17)

Directives issued by the Accounting Standards Board (ASB)

Accounting guideline issued by National Treasury relating to intangible assets

Municipal transfer and disposal regulations, Government Gazette no.31346

Government Gazette, 30 May 2005, No. 27636 on disposal


4

Document Version Control

Version Author Date Pages/Sections

affected Remarks

CITY OF MBOMBELA management policy .pdfReview Date: 29 March 2018 Page 5 1. Purpose of this document...

Documents

Transcript of CITY OF MBOMBELA management policy .pdfReview Date: 29 March 2018 Page 5 1. Purpose of this document...